HFTs must feel their world has been destroyed in an instant...........

The HFT Blowback Continues: Fidelity Creates New Trading Venue

In what the firm believes will be an improvement over other so-called dark pools because it will be a collaboration among big mutual-fund firms, WSJ reports that the giant fund manager is quietly building a new trading venue designed to let big money managers sidestep many of the problems that they argue lead to unfair or costly trading - i.e. avoid the HFT predation. Fidelity, with $1.95 trillion of assets under management, is in the initial stages of planning the trading venue and has just begun to pitch the idea to other large asset managers. It seems 5 years of vociferous exposure and a Michael Lewis book may be beginning to starve the HFTs of their prey.

The venue, if successfully launched, would represent an ambitious effort to reduce costs and streamline trading for the investment firms. The project is tentatively named "Sakura," which is the Japanese word for cherry blossom, according to people familiar with the matter.

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Plans for "Sakura" are emerging alongside a broadening debate about the fairness of the U.S. equity markets. Discussions have been stoked in part by a new book by Michael Lewis that alleges the markets are "rigged" in favor of exchanges, high-frequency traders and big banks at the expense of retail and institutional investors.

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The new trading system would be different from the dark pool already operated by Fidelity called CrossStream.

On one hand CNBC does its darnedest to refute Michael Lewis' claim that markets are rigged (even if it woefully does so by showcasing the most clueless "defenders" it can afford), and yet on the other "mom and pop's" preferred retail broker Charles Schwab, just came out and slammed HFT as a "growing cancer that needs to be addressed." Hmmm.... who to believe?

Schwab serves millions of investors and has been observing the development of high-frequency trading practices over the last few years with great concern. As we noted in an opinion piece in the Wall Street Journal last summer, high-frequency trading has run amok and is corrupting our capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for our commodity and equities exchanges. The primary principle behind our markets has always been that no one should carry an unfair advantage. That simple but fundamental principle is being broken.

High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets. It’s a growing cancer and needs to be addressed. If confidence erodes further, the fuel of our free-enterprise system, capital formation, is at risk. We can’t allow that to happen. For sure, we still believe investing in equities is a primary path to long-term wealth creation, and we believe in the long-term structural integrity of the markets to deliver that over time for individual investors, which is all the more reason to be vigilant in removing anything that creates unfair advantage or undermines investor confidence.

On March 18, New York Attorney General Eric Schneiderman announced his intention to “continue to shine a light on unseemly practices in the markets,” referring to the practices of high-frequency trading and the support they receive from other parties including the commodities and equities exchanges. He has been a consistent watchdog on this matter. We applaud his effort and encourage the SEC to raise the urgency on the issue and do all they can to stop this infection in our capital markets. Investors are being harmed, and they shouldn’t have to wait any longer.

As Michael Lewis shows in his new book Flash Boys, the high-frequency trading cancer is deep. It has become systematic and institutionalized, with the exchanges supporting it through practices such as preferential data feeds and developing multiple order types designed to benefit high-frequency traders. These traders have become the exchanges favored clients; today they generate the majority of transactions, which create market data revenue and other fees. Data last year from the Financial Information Forum showed this is no minor blip. High-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years early. Yet actual trade volume on the exchanges has remained relatively flat over that period. It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions. Trade orders from individual investors are now pawns in a bigger chess game.

The United States capital markets have been the envy of the world in creating a vibrant, stable and fair system supported by broad public participation for decades. Technology has been a central part of that positive story, especially in the last 30 years, with considerable benefit to the individual investor. But today, manipulative high-frequency trading takes advantage of these technological advances with a growing number of complex institutional order types, enabling practitioners to gain millisecond time advantages and cut ahead in line in front of traditional orders and with access to market data not available to other market participants.

High-frequency trading isn’t providing more efficient, liquid markets; it is a technological arms race designed to pick the pockets of legitimate market participants. That flies in the face of our markets’ founding principles. Historically, regulation has sought to protect investors by giving their orders priority over professional orders. In racing to accommodate and attract high-frequency trading business to their markets, the exchanges have turned this principle on its head. Through special order types, enhanced data feeds and co-location, professionals are given special access and entitlements to jump ahead of investor orders. Last year, more than 95 percent of high-frequency trader orders were cancelled, suggesting something else besides trading is at the heart of the strategy. Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. Our understanding of statistics tells us this isn’t possible without some built in advantage. Instead of leveling the playing field, the exchanges have tilted it against investors.

Unequal access to information: Exchanges allow high-frequency traders to purchase faster data feeds with detailed information about market trading activity and the specific trading of various types of market participants. This further tilts the playing field against the individual investor, who is already at an informational disadvantage by virtue of the slower Consolidated Data Stream that brokers are required by rule to purchase or, even worse, the 15- to 20-minute-delayed quote feed they have public access to.

Inappropriate use of information: Professionals are mining the detailed data feeds made available to them by the exchanges to sniff out and front-run large institutions (mutual funds and pension funds), which more often than not are investing and trading on behalf of individual investors.

Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure. The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.

There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It’s the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely. But if the practice is simply a scam, as we believe it is, an even better solution is to simply make it illegal. And exchanges should be neutral in the market. They should stop the practice of selling preferential access or data feeds and eliminate order types that allow high-frequency traders to jump ahead of legitimate order flow. These are all simply tools for scamming individual investors.

The integrity of the markets is at the heart of our economy. High-frequency trading undermines that integrity and causes the market to lose credibility and investors to lose trust. This hurts our economy and country. It is time to treat the cancer aggressively.

Charles Schwab, Founder and ChairmanWalt Bettinger, President and CEO

"The Market Is Rigged" - Michael Lewis Explains How HFTs "Screw" Investors Every Day

It was almost excatly five years ago to the day, on April 10, 2009, that Zero Hedge - widely mocked at the time by "experts" - began its crusade against HFT and the perils of algorithmic trading (which of course were validated a year later with the Flash Crash). In the interim period we wrote hundreds if not thousands of articlesdiscussing and explaining the pernicious, parasitic and destabilizing role HFT plays in modern market topology, and how with every passing day, markets are becoming increasingly more brittle, illiquid and, in one word, broken. Or, as Michael Lewis put it most succinctly, "rigged." With Lewis' appearance last night on 60 Minutes to promote his book Flash Boys, and to finally expose the HFT scourge for all to see, we consider our crusade against HFT finished. At this point it is up to the general population to decide if this season's participants on Dancing with the Stars or the fate of Honet Boo Boo is more important than having fair and unriggedmarkets (obviously, we know the answer).

And broken down by segment: in the clip below, Lewis explains how an extra millisecond allows high-frequency traders to exploit computerized trading in the U.S. stock market. By "beating" investors to exchanges, Lewis argues that high-frequency traders can buy stocks and quickly sell them back at higher prices.

Billions have been spent by Wall Street firms and stock exchanges to gain the advantage of a millisecond. "Is it a scam?" 60 Minutes correspondent Steve Kroft asks. Bigger, Lewis says.

Lewis further explains, video below, how ordinary investors are affected and argues that high-frequency traders have created instability in the stock market -- for everyone.

A reoccurring metaphor Lewis uses in his book "Flash Boys" is one of "prey and predators."According to Lewis, the prey is "anybody who's actually an investor in the stock market."